Commercial loans

What is a commercial loan?

A commercial loan is a type of funding for businesses. Once approved, business owners can then get access to capital for operational costs, expansion, or other business expenses. A commercial loan is versatile and can also be used to refinance existing loans. 

Types of commercial loans

Whether you are a business owner looking to grow your business or you are in the process of supplementing cash flow with alternative funding options, a commercial loan might be a good option for your business. You can choose from a working capital loan, commercial bridging loan, commercial property loan, or an alternative business loan.  

What is a working capital loan?

 A working capital loan is a type of commercial business loan, where a lender issues a business loan to support the day-to-day running of your business. These loans are usually repaid within a year or less through monthly repayments with fixed interest rates. They are a popular type of commercial loan as many businesses have fluctuating revenue, and unpredictable sales cycles, with periods of significantly fewer accounts receivable. Given that wages, rent, and stock remain, more or less fixed costs, working capital loans bridge the gap between income and expenses, over the short term.

What is a commercial bridging loan?

A commercial bridging loan is a type of secured business loan on a commercial or investment property. In essence, it is a form of funding used by business owners to acquire office space, boost cash flow, or refinance existing premises. One major benefit of a commercial bridging loan is the ease and speed with which it can be approved. However, to stand a chance of getting a commercial bridge loan, you will need to have a convincing plan regarding the sale of the property, refinancing to an alternative form of funding with lower interest rates including a commercial mortgage.

Bridging loans for commercial property are precisely what the name suggests: a method of securing a temporary funding arrangement that provides short-term funding until an exit strategy, like a refinancing or a sale, can be executed. 

What is a commercial mortgage?

A commercial mortgage is often referred to as a commercial property loan, and is used by business owners looking to purchase property or land for commercial use. Businesses that are looking to expand beyond their current business premises, retail space or factory might take out a commercial mortgage to cover the move to a new office space, or to acquire an investment property for rental income. 

What is an alternative business loan?

Alternative business lending is an umbrella term to describe the different types of business funding solutions and loans offered by non-traditional banks. In general, alternative business lenders are more flexible and more accessible for young businesses, businesses with bad credit, and or businesses that are looking for more competitive interest terms and conditions. 

How to choose the right commercial loan?

One of the primary decisions you will need to make before choosing a commercial loan is whether to go down the road of getting a secured loan, or instead, choosing an unsecured loan. 

What are secured loans?

The first type of loan is a secured loan. These business loans are ‘secured’ on assets owned by your business such as commercial property, machinery, vehicles and stock.

The lender takes a legal debenture over the asset, so if you stop making the loan repayments the lender can sell the asset, and you’ve provided security to recover the missed repayments. 

Thus, the resale value of the security determines how much you can borrow. With enough security, you can borrow up to 75% of the value of the asset. Let's say you wanted to borrow £10,000 but were only making £5,000 per month, the lender would question your application — because the loan-to-income ratio is higher than a typical lender would normally be comfortable with. However, if you had a piece of machinery worth £15,000 to use as security, this might sway their decision.

What are unsecured loans?

In contrast, unsecured loans don’t involve any security and hence require businesses that are stronger in terms of sales and profitability. Lenders offering unsecured business loans will want to see strong profits over a few years of trading history — and they’ll usually ask for a personal guarantee, which brings the personal assets of the business owner into consideration. Bear in mind that interest rates tend to be higher for unsecured business loans, as the risk to the lender is significantly higher than with a comparable secured loan.

Flexibility

Business loans usually have a fixed term and repayment schedule — but if your revenue is hard to predict, there are more flexible options on the market.

Presently, lots of lenders offer revolving credit facilities, which are like an overdraft that allows you to borrow when you need, over an agreed timeframe. In addition to setup fees you will only pay interest on what’s outstanding on the loan amount, so the credit line can remain interest-free when you don’t need it. This kind of safety net can be useful for businesses that are seasonal. It’s definitely worked checking out a commercial loan calculator, to see what amount you can apply for. 

In brief

Because loans vary in purpose, features, and terms, you won’t find one business loan to suit all businesses. Choosing the right business loan will require you to understand your business’s needs, long-term strategy, and level of risk tolerance, before deciding on a commercial loan. 

But whether you have good or bad credit, there’s a lender that will match your needs.